Question

Ginocera Inc. is a designer, manufacturer, and distributor of custom gourment kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 20Y8. In January, the company spent $600,000 to develop a late-night advertising infomercial for the new product. During 20Y8, the company spent an additional $1,400,000 promoting the product through these infomercials, and $800,000 in legal costs. The knives were ready for manufacture on January 1, 20Y8.

Ginocera uses a job order cost system to accumulate costs associated with the Kitchen Ninja Knife. The unit direct materials cost for the knife is:

Hardened steel blanks
(used for knife shaft and blade)	$4.00
Wood (for handle)	1.50
Packaging	0.50

The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives.

After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.50 per unit.

The knives are sold to stores. Each store is given promotional materials, such as posters and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.20 per knife.

Total completed production was 1,200,000 units during the year. Other information is as follows:

Number of customers (stores)	60,000
Number of knives sold	1,120,000
Wholesale price (to store) per knife	$16

Factory overhead cost is applied to jobs at the rate of $800 per stamping machine hour after the knife blanks are stamped. There were an additional 25,000 stamped knives, handles, and cases in process and waiting to be assembled on December 31, 20Y8.

	Required:
1.	Prepare an annual income statement for the Kitchen Ninja knife series, including supporting calculations, from the information provided. Refer to the list of Amount Descriptions for exact wording of the answer choices for text entries.*
2.	Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 20Y8.* *In your computations, if required, round interim per-unit costs to two decimal places.

Answer 1

1.

	Ginocera Inc. Income Statement For the Year Ended December 31, 20Y8
	Sales			$ 17,920,000
	Cost of goods sold			(10,864,000)
	Gross profit			$ 7,056,000
	Selling and administrative expenses:
	Selling expenses:
	Infomercial campaign	$2,000,000
	Promotional materials	3,600,000
	Shipping expenses	224,000
	Total selling expenses		$5,824,000
	Administrative expenses:
	Legal expenses		800,000
	Total selling and administrative
	expenses			(6,624,000)
	Operating income			$ 432,000

Supporting calculations:

Sales: 1,120,000 units × $16 = $17,920,000

Cost of goods sold: 1,120,000 units × $9.70 = $10,864,000

Manufacturing cost per unit:

Direct materials:

Hardened steel blanks...................................... $4.00

Wood (for handle).............................................. 1.50

Packaging........................................................... 0.50

Total direct materials........................................ $6.00

Direct labor.............................................................. 0.50

Factory overhead*..................................................    3.20

Total manufacturing cost per knife................. $9.70

* $800 ÷ 250 knives per hour

Promotional materials: 60,000 stores × $60 = $3,600,000

Shipping expenses: 1,120,000 units × $0.20 = $224,000

2.

Finished Goods balance, December 31, 20Y8:

(1,200,000 units – 1,120,000 units) × $9.70 = $776,000

Work in Process, December 31, 20Y8:

25,000 units × ($6.00 + $3.20) = $230,000

The materials, stamping, and factory overhead have already been applied to the 25,000 units. Only the direct assembly labor has yet to be applied for these units.